In the second quarter Facebook continued its trend of growing mobile ad revenue to a larger share of its total advertising revenue. Although this result is in line with our conclusions based on Facebook’s performance in the first quarter, the significant beat on estimates has resulted in the stock price rising to pre-IPO levels. In order to understand how Facebook has continued to grow mobile ad revenue, we need to reassess its advertising business.
We determined that in the first quarter increases in advertisements delivered and price paid per ad resulted primarily from News Feed ads on Facebook’s desktop product, and to a lesser extent on its mobile products. We also observed increases in user engagement in the quarter. Finally, Facebook’s decision to lower the market reserve price increased market supply for ads on the network essentially by reducing the input costs for advertisers.
Revenue in the second quarter remains highest in North America and Europe; however, the growth in Facebook’s emerging market regions continues to outpace the established markets. The North America region saw $721 million in revenue, an increase of 51% over the year ago quarter. Europe region’s revenue grew from $294 to $479 million, a 53% year-over-year increase. In Asia and rest of world revenue essentially doubled over the year ago quarter.1
According to Facebook, ads delivered on the network increased by 43% over the year ago quarter. In addition to concurrent growth in ROI across multiple segments cited by the company during its earnings call, we also can see an increase in mobile revenue’s share of total advertising revenue in the quarter. Where mobile advertising revenue accounted for 30% of revenue in the first quarter, its share in the second quarter increased to a full 41% of revenue.2
We can determine the exact revenue Facebook generated from mobile advertising on a quarterly basis. In Q4 2012 its share increased to 21% or $306 million. In the first quarter, mobile ad revenue generated $386 million, reflecting an increase to 31% of ad revenue. In the second quarter mobile ad revenue increased to 41% of total ad revenue. As a result, Facebook generated a more substantial $656 million in mobile ad revenue in the quarter.
We can contextualize the absolute growth in ad revenue in the second quarter by examining advertising average revenue per user (ARPU). Based on our estimates going back to Q2 2010, we can see a steady rise in advertising ARPU in each region. However, in the second quarter we notice a sizeable sequential increase in ARPU. This increase can be explained by Facebook’s improved ad targeting mechanisms rolled out near the end of Q1 2013.
As the company noted in its earnings call, the number of marketers on Facebook using Custom Audiences, a product that enables clients to merry audience data to better target ads, doubled on a sequential basis. Concurrently, Facebook in April rolled out ad targeting for feature phones. We can observe the effect on advertising ARPU in Facebook’s emerging markets, where feature phones continue to dominate the market landscape.
Facebook’s amended S-1 attempted to curb early expectations by remarking on the difficulties of mobile monetization, casting some doubt on the company’s ability to meaningfully monetize the structural shift in networked computing to a mobile first and increasingly mobile only model. Two consecutive quarters of meaningful mobile revenue growth should assage fears about the mobile viability of Facebook’s advertising model.
Facebook still faces challenges to sustained mobile monetization. Increasing ads on its mobile products could reduce user engagement despite growth in mobile monthly usage. The company admitted that it is still tweaking advertising delivery on mobile products. This suggests that Facebook is aware of the delicate balance between increased ad delivery and ROI for advertisers, and its effects on the user experience. We should expect Facebook to continue to deliver short-run gains in mobile ad revenue.